I start every 50-minute segment of my class with a 5-minute discussion in which the students can ask about or talk about anything as long as it is economics. I’ve been doing it since January 1993 and it has been a big hit.
Sometimes I get caught off guard because I’m asked about something that I have general knowledge about but don’t know the exact specifics. So I was pleased that even my thinking about numbers was in the ball park.
The student who asked the question had sent it to me the night before and it was about his worry that the recent partial government shutdown and wrangling over the debt would hurt the United States in its competition with other countries. I emailed back that countries don’t compete economically and asked him if he wanted me to talk about that in the next morning’s discussion. He said he did and so I showed up the next morning after a quick skimming of some great essays by Paul Krugman in his book, Pop Internationalism.
I made the case and the students seemed to get it.
Of course, though, one thing led to another and the student’s follow-up was about the danger of the U.S. $ no longer being the world’s currency. I pointed out that it was a matter of degree and that the major benefit to the U.S. government from having the dollar widely used is that the government can create $1 bills for about 6 cents and $100 bills for about 25 cents and, in return for people in other countries holding on to those bills, we got real goods worth respectively, at least $1 and $100. I also said that my impression is that the annual gain to the U.S. government from people holding these bills is probably no more than $30 billion, a large number, but less than 0.2 percent of U.S. GDP.
So it was heartening to check Paul Krugman’s blog today and find him making the same point and even presenting very similar numbers. Here are his relevant two sentences:
What is true is that the large holdings of US currency outside the United States — largely in the form of $100 bills, held for obvious reasons — represent, in effect, a roughly $500 billion zero-interest loan to America. That’s nice, but even in normal times it’s only worth around $20 billion a year, or roughly 0.15 percent of GDP.
After class, the student stayed around to talk and I pointed out that when the Euro came into existence, I thought it had a good chance of, at least on the margin, replacing the dollar in people’s holdings abroad for one main reason: the highest-denomination Euro was 500 Euros. But, I noted, once the EU got rid of the 500 Euro and made the highest denomination 100 Euro, there went that chance to compete. On this I was wrong. Despite some pressure to get rid of it, the 500 Euro still exists.